Construction Contracts: Mediation Is A Great Alternative To Litigation

Mediation bigstock-Attorney-at-Law-sitting-at-des-49285283 copyMediation and Construction Law are two of my favorite topics to discuss. These are my favorite aspects of the practice of law. Every construction law dispute I encounter starts with the premise of getting contractors paid. No matter the dispute, the underlying factor is withholding of money along the hierarchical chain of characters.

Owners need to get cash from the lenders. General Contractors need to get progress payments from the Owner. Subs are always waiting on the GC to pay out. Suppliers provide goods on credit with the hopes of getting paid once the other parties take their share. There are small margins for error and high possibility of dispute.

With such small percentage of money actually going to profits its no wonder owners, general contractors, subcontractors and suppliers cannot afford expensive litigation. There are efficient and cost effective means to settle disputes without having to tee it up in the courts, Mediation and Arbitration. For the purposes of this blog, I will be speaking to the more flexible of the two forms of alternative dispute resolution methods, Mediation.

Do Construction Contracts Contain Mediation Clauses?

It depends on the contract. Many American Institute of Architects (AIA) form contracts will allow for an option to include both a mediation and arbitration clause for alternative dispute resolution. If you are unsure if your contract has  mediation clause you should look to see if there is some type of language like the following provided by the American Arbitration Association (AAA), who is the leader in the arbitration and mediation space.

If a dispute arises out of or relates to this contract, or the breach thereof, and if the dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its Construction Industry Mediation Procedures before resorting to arbitration, litigation, or some other dispute resolution procedure.” AAA Construction Industry Arbitration Rules and Mediation Procedures (pg 14).

There are many variations on this type of clause. Courts are very keen on upholding mediation clause language because courts favor resolving disputes through other means.

Construction Disputes Settle With Mediation

Some disputes will never settle. The parties are so entrenched to a position that they become irrational and will not compromise. The construction industry is different. Contractors tend to want to continue doing business and therefore do not want to burn bridges.

I have personally been witness to numerous construction disputes setting through mediation. The parties agree to meet with a neutral third party, the mediator, and go through the process until a compromise is reached. Conventional wisdom states that the best settlements are those where both sides leave unhappy.

Construction disputes are no different. Each party negotiates some give and take until a compromise is reached. I see it all the time. Have your attorney put mediation clauses in your company’s contracts. Do not sign contracts unless they have a mediation clause. Finally, even if there is not a specific clause mandating mediation, you can still mediate! All that is required are two parties who want to solve a dispute.

 

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Construction Contracts – What is My Scope of Work?

English: Contractor-led design-build, architec...
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The importance of your construction contract cannot be understated. Surprisingly, people on all ends of the contracting process don’t always understand the importance of the words chosen in their agreement. Whether you’re a general contractor, subcontractor or homeowner, you should be familiar with all aspects of your construction contract. Most importantly, you should be able to understand and answer “what is my scope of work?”

What is the Scope of Work Generally

While this might not seem like a difficult question to answer, it often times lies at the heart of any construction litigation: determining what the scope of work on a particular project is, generally. The scope of work section of a construction contract varies greatly. Here at Wolfe Law Group, we have pretty much seen them all. These provisions can range from the incredibly vague and brief (I’ve seen scope of work provisions that are just two bullet points), to the exceptionally detailed and verbose. Regardless of the length or detail of this construction contract provision, the scope of work section generally serves one overarching purpose: it establishes the duty owed by one party to another.

This is the first answer to “what is my scope of work?” It is the basis of your contract. Without it, it would be impossible to determine where a contractor’s liability  begins or ends. Of course, this is the general “contracts law” answer. After realizing the general importance of this contract provision, we then are able to see how we can manipulate those terms in order to have the most efficient contract possible.

What is the Scope of Work Specifically

As we have written before, the scope of work provision in each contract can, and should, vary. This variation will make a great difference depending on your status in the construction project. A general contractor, for example, benefits from a vague scope of work provision in its subcontracts, but would want specific provisions in its general contract. The subcontractor, necessarily, would want a very specific scope of work provision in its subcontracts. A homeowner would likely want the terms of the general contract to be as vague and inclusive as possible. Why? The short answer: liability.

As stated above, the scope of work provision serves as the basis of your contract. As such, it establishes the rights between the parties with regards to what work is expected and promised. The specificity of the scope of work provision, then, directly relates to a party’s liability. The general contractor would not want to sign a general contract with a broad, open-ended scope of work because then the homeowner could read much further into the provision than was intended. Should a conflict arise, the general contractor wants those terms to be as narrow and precise as possible so that they are not “on the hook” for much more than was anticipated. This mindset is what governs the scope of work determination in subcontracts as well. There, the general is going to want the broad terms so that the subcontractor is potentially responsible for more than they intended. It is important, therefore, to outline your scope of work deliberately and specifically, because it will be a determining factor in one’s liability to another party.

Extra-Contractual Provisions

Rarely, though, are contracts permanently fixed and limited to its original terms. Certain instances do arise where changes are made to the contract as the work progresses. Those become part of the scope of work as you continue working, and will dictate one party’s liability to another should a conflict arise. Sometimes, there are third party agreements that people wish to be considered part of a contractor’s scope of work. I mention this because of how frequently this situation has been coming across my desk with regards to the Hazard Mitigation Grant Program (HMGP).

While the HMGP warrants a whole blog to itself (not just a post, but a WHOLE blog), there is one particular provision that I have had numerous parties contact us about here at Wolfe Law Group: scope of work. Through the program, a contractor would execute an agreement with the homeowner which contained the scope of work. The difference, though, is that these two parties are not the only parties to ultimately define what that scope of work actually is! Instead, the HMGP has a separate scope of work that was/is eligible to receive grant payments. This is causing some severe issues between contractors and homeowners because people are not sure what they are responsible for and owners are not sure what they are entitled to. These problems could be resolved if parties paid closer attention to their scope of work provisions.

The short answer is that HMGP will pay for items contained in the general contract’s scope of work that is contained in the HMGP scope of work guidelines. Anything beyond that will not be eligible for payments. However, contractors need to be careful because even if the terms of their scope of work are not included in the HMGP scope, they are still bound by their contract with the homeowner. It’s a very tricky situation that involves various presumptions, but it is a reality. The best advice I can give to deal with issues as complicated as the scope of work is the advice I give all the time: contact an attorney that handles these things. It’s your safest bet.

 

 

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Joint Check Agreements On Construction Projects: What Suppliers Need To Know

Joint check agreements are very popular in the construction industry. In fact, many folks mistakenly believe that joint check agreements are exclusively a construction industry instrument.  Many folks also believe that joint check agreements are all the same, that there is standardized agreement language and rules, that they offer a lot of payment security, and a host of other incorrect assumptions. Perhaps the joint check agreement is the most misunderstood and dangerous document you can confront on a construction project.

Safety Is Not Guaranteed With Joint Check Agreements

zlien conducted a Webinar a few weeks ago titled “Joint Check Agreement Mistakes That Can Cost You Thousands,” and the video recording of that Webinar is embedded at the top of this post. It’s a great presentation that gives a high level overview of common joint check agreement mistakes.

One of my favorite parts of the presentation comes right at the beginning when it’s suggested that the Joint Check Agreement is not a security device, but is instead a “floatation device.”  These agreements, in other words, are only used by parties when things are going wrong in some way.

Think about when your company has encountered joint check agreements:

  1. Your customer doesn’t have the credit with you, and so you get a JCA with another party to back them up
  2. Your customer runs into cash problems on the project and you look for a JCA to continue furnishing
  3. Your customer gets replaced on the project and the GC or owner gives a JCA so you will continue furnishing to the new party

What do all of these things have in common?  Something has gone wrong with your customer, or your customer isn’t in a good enough financial position. Right from the start, therefore, you should be cautious about joint check agreements. They are a floatation device thrown at sea to help companies that are drowning. They help, and they may save the situation, but the parties are not out of the woods simply because it’s been thrown overboard and grabbed.

The Joint Check Rule Is Shocking, But Real

You likely never heard of the “Joint Check Rule,” or otherwise, you don’t understand it.  Nevertheless, if you’re not careful, you can find yourself on the wrong side of this rule and subjected to a substantial loss.

The rule as applied in California is explained (and defined) nicely by the court in Post Bros. Constr. Co v. Yoder as follows:

When a subcontractor and his materialman are joint payees, and no agreement exists with the owner or general contractor as to allocation or proceeds, the materialman by endorsing the check will be deemed to have received the money due him.

This interpretation of the “joint check  rule” has been adopted by a number of states, including Arizona, California, and Washington. However, these are not the only three states who’ve adopted the rule, and unfortunately for clarity’s sake, many courts have not weighed in on whether they would or would not adopt the rule. This leaves the parties subjected to a difficult legal gray area.

For various reasons, every supplier in every state should consider the joint check rule applicable to their project. Every time a joint check is received by a supplier, the supplier should only cash the check if the amount paid is the total amount due as of the date of deposit.

Yes, I understand that you do progress billing and progress payment. Yes, I understand that this isn’t how the construction industry practically works.  Yes, I understand that your business has been employing opposite practices for years. Yes, I believe that the rule is unfair and ridiculous.

Yet, it is the rule.

Conclusion: Use The Joint Check Agreement, But Keep Your Eyes Open

This article is pretty rough on the joint check agreement and that is a tad unfortunate, because the instrument is wildly popular and very useful for a lot of circumstances. There are a thousand examples of situations when the joint check agreement can be an asset for your company.

However, there are a lot of misunderstandings about these agreements, and a lot of dangers.

The moral of this article is not to bury the importance or usefulness of joint check agreements, but just to educate you of their dangers so you keep your eyes open and avoid costly mistakes.

 

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